Introduction to Mortgage Servicing Examinations Training - March 2023

Capital and Servicing Liquidity

The Final Model Standards for capital are based on FHFA eligibility requirements for enterprise single family seller/servicers 13 and currently require the following: Tangible net worth: Total equity less receivables due from related entities less goodwill and other intangibles 14 less pledged assets.

Minimum capital: • Minimum net worth of $2.5 million. • Tangible net worth divided by total assets > 6%.

For nonbank owners of MSRs, there is an additional net worth requirement of 25 basis points of UPB for total loans serviced, excluding reverse mortgage servicing, subservicing for others, and “interim” 15 servicing. Special note: In practice, the minimum capital ratio is calculated based on a GAAP as well as a non-GAAP basis, the latter reflecting allowable, documented GSE removals for assets and liabilities associated with items such as reverse mortgages, subservicing contracts, rights to MSRs, seriously delinquent loans in Ginnie Mae MBS and optional early buyout balances and securitized loan balances where only a residual interest is owned.

Liquidity

The following important terms are applicable to the liquidity standards:

• Servicing liquidity 16 or liquidity: The financial resources necessary to manage liquidity risk arising from servicing functions required in acquiring and financing MSRs, hedging costs (including margin calls) associated with the MSR asset and applicable financing facilities, and advances or costs of advance financing for principal, interest, taxes, insurance, and any other servicing related advances. • Operating liquidity: The funds necessary to perform normal business operations, such as payment of rent, salaries, interest expense and other typical expenses associated with operating the entity. Consideration for operating liquidity must include an 13 https://www.fhfa.gov/PolicyProgramsResearch/Policy/Documents/2015-FAQs.pdf 14 For purposes of this calculation, other intangibles exclude the value of MSRs whether pledged to secure financing or not. 15 “Interim” means the period of time in which an originator is responsible for servicing the loan prior to sale of the loan and the associated MSR. 16 State regulators refer to servicing liquidity to differentiate this type of liquidity from operating liquidity. FHFA draws no distinction between servicing liquidity and operating liquidity. Therefore, the terms servicing liquidity and liquidity have the same meaning. At times, these standards use the term servicing liquidity to draw a clear distinction from operating liquidity.

17 Proposed Prudential Standards for Nonbank Mortgage Servicers 2021